Ending Medicare’s Hospital Markup: A Site-Neutral Path to Lower Costs for Seniors

Overview

The cost of medical care for seniors has risen sharply in recent years, driven in part by a fundamental payment inequity in Medicare. The program pays hospital-owned outpatient departments (HOPDs) 43% to 670% more than independent clinics for delivering the same services. Since Medicare charges seniors a 20% coinsurance on outpatient care, this markup hits beneficiaries directly. This disparity also encourages large hospital systems to acquire physician practices and reclassify them as HOPDs to capture higher Medicare payments.

Policymakers have a crucial opportunity to deliver financial relief to patients and taxpayers by ensuring Medicare pays the same reimbursement rates for services delivered in HOPDs and independent physician offices. Since 2015, Congress and the Department of Health and Human Services (HHS) under the Trump Administration have taken important first steps to establish site-neutral payment rates for specific services and facilities. This Expert Insight examines how Congress can build on these reforms through comprehensive site-neutral legislation and how HHS can leverage its existing legal authority to extend site-neutral payments to nuclear cardiology imaging services. Together, these changes would save taxpayers $156.9 billion and beneficiaries $137 billion over the next decade and curb Medicare’s incentives that reward hospital systems for consolidating physician practices.

Medicare’s Payment System for Outpatient Care

Under Medicare Part B, the program’s payment system for outpatient services, the setting where a senior receives care, not the care itself, dictates how much taxpayers and seniors pay. When a senior visits an independent physician's office, Medicare pays the practice a single amount under the Physician Fee Schedule (PFS) at the non-facility rate. That rate reimburses the physician’s skill and time along with the equipment, clinical staff, medical supplies, and overhead used to perform the service. Medicare covers 80% of the non-facility rate and the senior pays the remaining 20% in coinsurance.

When that same senior visits a HOPD, including standalone physician clinics that are located outside of a hospital’s campus, Medicare pays the hospital twice. It sends one payment through the PFS to cover the physician's skill and time in delivering the service. It then pays an additional facility fee through the Outpatient Prospective Payment System (OPPS) to cover the facility’s equipment, staff, supplies, and overhead costs. OPPS pays HOPDs significantly more for these non-physician expenses than the PFS pays independent offices for delivering the exact same service. The senior's 20% coinsurance is calculated against the combined, inflated total.

As a result, Medicare and its beneficiaries pay dramatically more for care when it is delivered in an HOPD as opposed to an independent physician office. A 2023 analysis by the Yale Tobin Center for Economic Policy found that Medicare reimburses HOPDs 43% to 670% more than independent physician practices for a variety of outpatient services.

Medicare Payments Encourage Hospital Consolidation

Since Medicare pays much more for services delivered by hospital-owned facilities, hospital systems have a powerful incentive to acquire independent physician practices, redesignate them as HOPDs, and bill at the higher rate. Between 2012 and 2024, the share of physicians working in hospital-owned practices climbed from 23.4% to 34.5%. Once acquired, large systems then leverage these practices to refer patients to their hospital campuses, diverting patients and revenue from competing community hospitals. The consequences for patients are higher costs for essential care and fewer options for accessing quality, community-based services.

It is imperative that policymakers address these financial burdens on seniors. In 2024, 7.4 million seniors spent more than 10% of their income on Part B premiums. The Boards of Trustees for the Medicare Trust Funds estimate that annual Part B premiums will increase by 77.7%, from $2,434 to $4,327, between 2026 and 2035.

Opportunity to Curb Healthcare Prices for Seniors

In 2015, Congress took crucial first steps to curb Medicare’s subsidies for hospital monopolies. Lawmakers enacted the Bipartisan Budget Act (BBA) of 2015, which barred Medicare from paying the traditional facility fee through OPPS to off-campus HOPDs that began billing Medicare as hospital outpatient departments on or after November 2, 2015. Medicare now pays these HOPDs under the PFS at a rate equal to 40% of OPPS’s facility fee, a level HHS set so that the total payment to these facilities is roughly equal, on average, to what independently owned physician practices receive for the same services. However, this legislation shifted only 0.8% of spending under OPPS to the lower independent office rate.

Congress has several options to build on the BBA’s reforms by expanding site-neutral payments to more hospital-owned facilities. Comprehensive site-neutral payment reform would lower Medicare’s reimbursement rates for outpatient services across all HOPDs, both on-campus and off-campus facilities. In 2020, President Donald Trump called on Congress to enact comprehensive site-neutral reform as part of his fiscal year 2021 White House budget proposal. The Congressional Budget Office (CBO) estimated this reform would save $156.9 billion over ten years, according to its most recent estimates. Comprehensive site-neutral payment reform would also save Medicare beneficiaries $137 billion in the form of lower Part B premiums, coinsurance, and Medigap expenses, according to the Committee for a Responsible Federal Budget.

Alternatively, lawmakers could target site-neutral measures exclusively at standalone HOPDs that are located outside of the hospital campus. President Trump also included this provision in his 2021 budget proposal. CBO estimates that applying site-neutral payments to off-campus facilities would save $39 billion over a decade.

Congress may also consider equalizing Medicare’s payment rates for services that are commonly delivered in independent offices. In 2023, the Medicare Payment Advisory Commission (MedPAC) identified 57 ambulatory payment classifications for services that are commonly delivered in independent practices and analyzed how much Medicare and beneficiaries would save if a site-neutral payment rate were applied to all of them. MedPAC found that equalizing payment rates for these services to the independent office rate would save seniors $1.2 billion in lower cost-sharing expenses and save taxpayers $4.9 billion on an annual basis.

The Trump Administration’s Authority to Put Patients First

HHS also has an important role to play in enacting site-neutral payment reform. Congress gave the agency a powerful lever to combat Medicare’s payment-driven consolidation of physician practices. When lawmakers enacted Medicare’s OPPS as part of the Balanced Budget Act of 1997, they anticipated that the new system might encourage hospital-owned facilities to deliver unnecessary outpatient services to generate higher Medicare payments at taxpayer expense. To guard against this, they gave the Secretary of HHS a clear directive under the Social Security Act (SSA):

“The Secretary shall develop a method for controlling unnecessary increases in the volume of covered [hospital outpatient] services.”

In both of President Trump's terms, HHS has exercised this authority on behalf of patients. In 2018 and 2025, the Centers for Medicare & Medicaid Services (CMS), the HHS agency that administers Medicare, finalized two rules equalizing Medicare's payment for clinic visits and drug administration services between off-campus HOPDs and independent physician practices. On July 2, 2026, CMS proposed an additional rule equalizing the reimbursement rate for imaging without contrast services, such as X-rays, CT scans, and ultrasounds. These services are safely and effectively provided in both independent physician practices and HOPDs. However, Medicare pays HOPDs substantially more than independent practices for these services, thereby giving hospital systems a clear incentive to buy independent practices, redesignate them as HOPDs, and bill the service at the higher reimbursement rate. CMS argued that when a service can be safely provided in both settings, it is not prudent for Medicare to pay HOPDs more to deliver it, because the payment differential drives consolidation and pushes more services into the higher-cost setting. CMS concluded that applying a site-neutral payment is an effective method to control unnecessary increases in these services because a site-neutral payment would remove the payment differential incentive driving hospital consolidation of physician practices. As CMS explained in its rule to establish site-neutral payments for clinic visits:

“We consider the shift of services from the physician office to the hospital outpatient department unnecessary if the beneficiary can safely receive the same services in a lower cost setting but is instead receiving services in the higher paid setting due to payment incentives… we believe this method of capping payment will control unnecessary volume increases both in terms of numbers of covered outpatient department services furnished and costs of those services.”

Together, CMS’s site-neutral reforms for clinic visits and drug-administration services generate an estimated $1.09 billion in annual savings for beneficiaries and taxpayers while removing a key incentive for further consolidation. The newly proposed site-neutral payment policy for imaging without contrast services will save taxpayers $190 million and generate an additional $70 million in savings for beneficiaries in lower cost-sharing expenses in 2027, according to CMS. Over the next ten years, the imaging proposal would reduce Part B spending by $7.2 billion.

Applying the Department’s Established Authority to Nuclear Cardiology Imaging Services

CMS has an extraordinary opportunity to build on its authority under the SSA to further curb Medicare’s perverse incentives by extending site-neutral payments to other services that have migrated into hospital-owned facilities. Nuclear cardiology imaging services are another clear example of where the agency can apply this policy. These tests use radioactive compounds injected in small, safe amounts into a patient’s bloodstream to create detailed images of blood flow to the heart, helping diagnose and manage conditions such as coronary artery disease and heart failure. Between 2012 and 2021, the share of nuclear cardiology services delivered in an HOPD increased from 33.9% to 47.6%, according to a 2023 report by MedPAC.

Medicare’s higher payments for HOPDs played a major role in hospital systems acquiring independent offices, shifting more of these services toward the HOPD setting. CMS data shows that Medicare pays HOPDs 313.2% more, on average, than independent offices for four common nuclear cardiology services. As a result, a senior's out-of-pocket expenses for these services can rise by $193.79 to $220.98 per service when the same care is delivered in an HOPD rather than in an independent physician’s office.

Source: Author’s calculations of CMS’s 2026 payment rates. The Independent Physician Office Rate is the Physician Fee Schedule non-facility global rate. The Hospital-Owned Office Rate is the sum of the hospital's OPPS Addendum B facility fee and the Physician Fee Schedule facility rate.

The same legal approach CMS used to equalize payments for clinic visits, drug administration, and imaging without contrast services can apply equally to nuclear cardiology services. These services are safely and effectively performed in independent physician offices today. Medicare reimburses nuclear cardiology imaging services at a significantly higher rate when they are delivered in an HOPD as opposed to an independent physician office. These services are now being increasingly delivered in the more expensive HOPD setting as a result of hospitals acquiring independent physician offices, the same pattern that CMS flagged as "unnecessary" when it acted on clinic visits, drug administration, and imaging without contrast services. Extending site-neutral payment to nuclear cardiology imaging services furnished in off-campus HOPDs would build directly on the legal foundation CMS has already established.

Conclusion

Medicare's payment disparity between HOPDs and independent physician practices is driving up costs for seniors, accelerating hospital consolidation, and wasting billions in taxpayer dollars. When Medicare pays 43% to 670% more for the same service based solely on facility ownership, the program creates a significant incentive for hospital systems to acquire independent practices. The program rewards hospital monopolies at the expense of the patients and taxpayers it exists to serve.

Fortunately, policymakers hold two powerful levers to end Medicare’s markups. Congress can build on the Bipartisan Budget Act of 2015 and enact site-neutral payment reform across all hospital-owned outpatient facilities, saving taxpayers as much as $156.9 billion and beneficiaries $137 billion over the next decade. At the same time, HHS can exercise its authority under the SSA to extend site-neutral payments to nuclear cardiology services, delivering immediate relief to seniors and taxpayers. Every year of delay means higher premiums for beneficiaries, avoidable costs for taxpayers, and another wave of independent practices absorbed into hospital systems. Congress and HHS should act now to make care more affordable, restore competition to healthcare markets, and put patients, not hospital monopolies, first.